GOLD AS MONEY AND THE DEVELOPMENT OF THE LONDON MARKET Pau aul - PowerPoint PPT Presentation

GOLD AS MONEY AND THE DEVELOPMENT OF THE LONDON MARKET Pau aul Fisher, LBM BMA A Chai airman an 27 Septem ember er 201 019

GOLD Chemical S l Symbol l AU/Lat atin: in: CHEMISTRY AURUM RUM = = Glowing Dawn or p r possi sibly ly AUR URORA = = Goddess of the Dawn Atom omic Weight = = 79. 79. One o e of t the h e highest a and h hea eaviest el eleme ements that occurs na natu turally. A Trans nsition M n Meta tal, Group up 1 11 of periodic ta table, along ng w with th: Cop opper (29) (29) a and S Silver (4 (47) 7) and Roen entg tgen enium (111 111)

CHARACTERISTICS OF GOLD  Malleable a and nd duc ucti tile; c cond nductive.  Attr ttractive (shiny a y and nd bright, l like th the sun) un). Heavy/dense.   Found und i in n its ts na natur tural s sta tate (as w wel ell as in ore, e, a alloyed ed w with o other me metals). WHY HY I IS G GOLD S SO  Resistant t to cor o corros osion on e.g. b by o oxygen or or mos ost HI HIGHLY PRIZ IZED? D? acids ( (except A Aqua ua Regia: nitric+ c+hydr droch chloric). ).  Rar are – fr from om a asteroi oids/meteorites? 3

WH WHAT I T IS M S MONEY Y USE USED FOR? R? • Mediu dium o of exchan ange • St Store o of val alue • Unit o of acco ccount Gold ha has be been u used f for a all of the f these bu but be because o of i f its ts sc scarcity it it could n not o origi iginally b be u use sed a as s money. Ra Rather it it was s use sed f for r relig ligious puro roses, a adorn rnment, p pre restige e etc.

CHARA RACTE TERI RISTI STICS MONEY NEY vs vs GOLD • Durab abil ility ity  Very di difficult t to de destroy • Portab tabil ility ity  Yes, b but heavy • Accepta tabil ility ity  No No-on one’s l liabil ility ity • Limited ed s supp pply ly  Nat atural ally l limi imited • Divisib sibil ility ity  Yes, bu but .. • Uniformi mity  Need eds c checking!

LIMITED SUPPLY OF GOLD • Around d 190,000 tonnes of go gold a above gr ground t toda day. • That i is around 1 10,000 m m 3 . • A A cub ube less ss th than n 22m on each si side. • = 3 ½ Olym ympic swimming pools ls. • Nea early 9 90% mi mined s since Californian go gold r rush 1849. • Appr pprox half has b been een produ duced ed since e 1972. • Mining g produ duction i is around 3 d 3,000 tonne nnes pa. a. • Recycling var aries wit ith p price : mayb ybe 1000 tonne nnes pa. a.

THE HISTORY OF GOLD AS MONEY  Ear arlie iest jewelry found dat ates bac ack to ?B ?Bulgar aria a c4500 BC.  For orm of of mon oney – but barter er – c3500 B BC in Easter ern Medi diterranean.  Gold ld b bar ars in cit ity-state of Troy c2500 BC.  Gold d coins (elec ectrum) s m) started ed t to be used a d around d c550 B BC in Lydi dia (moder ern Turkey), ), b by Croes esus.  Gold ‘ Go ‘stamps’ c500 BC in China.  Two t things al allowed t the in introduction o of coin ins in Lydia ia (i) findi ding g enough of it it for use as as coin an and ( (ii ii) the ab abil ility to refine for purity – usin ing s sal alt to get the silv ilver out.

REFINING The LBMA Assaying & Refining Conference London 2017 Earthenware pot, blackened by heat – from excavations at Sardis, Lydia Diagram of how the pot is thought to have been used to refine (modern Turkey) impure alluvial gold, beaten into thin sheets, packed between Reconstruction to show how it was used layers of salt parting cement, heated for many hours below the as a parting vessel melting temperature of gold, removing the silver as chloride. (Ramage and Craddock 2000, King Croesus' Gold: Excavations at Sardis. fig. 4.31)

GOLD I IS S NOT T Gold can be used as money but not for most common transactions because: EN ENOUGH GH… Smallest coin too valuable • • Too heavy for large transactions (paper easier) • There isn’t enough of it Instead, other forms of money are used: Base metals with value Other precious metals (esp copper, bronze (copper and (esp silver) tin)) Paper currency Electronic money (eg China under Kublai Khan early (now dominant) C13th) or coins that are less than or Crypto-currencies? content value. “Gold standard” links gold to other forms of money

TYPES OF GOLD STANDARD 1. Gold sp specie ie standard – gold coins circulate but so do others, which are linked in value to gold. 2. Gold bullio ion standard – no gold coins but the authorities sell bullion on demand at a fixed price for currency. 3. Gold exchange standard – fixed exchange rates with at least one currency fixed to gold.

‘THE’ GOLD STANDARD  Relatively modern and short: Britain adopted from 1717, formally in 1821; US formally in 1900, most other major countries c1870/80s.  Originally a gold spec ecie e standard.  Suspended during WWI (1914-25).  Post-WWI resurrected as a gold bullion on s tandard.  Effectively died in 1931 when Britain left.  But Bretton Woods from 1944 was a gold exchange ge standard until 1971 with the US$ pegged at $35 per oz.

HOW DID THE WITH THIN O ONE C COUN UNTR TRY GOLD • Form of nominal targeting with gold the anchor. STANDARD • If price of gold fixed then all other prices are set relative to it. • If gold supply limited then should prevent inflation. WORK? • Authorities (eg central bank) need to supply or take gold at the given price in exchange for deposits/currency. • If non-gold prices rise, gold becomes cheap, so gold leaves the central bank. So raise the price of money - ‘Bank Rate’ - to retain deposits. • That depresses activity generally, limiting the demand for gold. ACR CROSS B S BORDERS • A bit like inflation targeting! • If all countries fix domestic prices to gold, then exchange rates between currencies should be stable. • International creditors can convert local payments to gold. • That in turn makes currencies acceptable and facilitates trade. • If running a trade deficit i.e. suppressed inflation, then a country will lose gold abroad. • So need to raise Bank Rate or do something to limit outflow.

BRETTON BRETTON  Fixed exchange rate regime. WOODS WOODS  US as numeraire fixed to gold at $35oz as it had since REGIME REGIME 1934. 1944 1944  US willing to buy at $35 from anyone and would sell to CREATED T THE IMF central banks (only) at that price.  Hence gold exchange standard.  NB The ’London Gold Pool’ – club of 8 central banks intervened to try and stabilise the market price of gold 1961-68.  Bretton Woods collapsed in 1971. (Vietnam War)

WASHINGTON  Under floating exchange rates, central banks eventually started to sell gold. Unusually, UK pre- AGREEMENT announced.  Washington agreement 1999 between a number of European central banks gave certainty to market that no more than 2000 tonnes would be sold over a 5 year period.  Market immediately rallied.  UK sold at average $275 oz. Current price around $1,500 and has been as high as $1,917.9 oz (August 2011).

MAIN TAKEAWAYS Despite it its lon ong his istory, t there w was n never m much of of it it so o it its rol ole a as 01 mon oney h has be been im important, bu but lim imited. 02 Most g gold ld a above g grou ound now i is rela latively ly r recent: c1850 o onwards. Many desirab able le p prop operties – perhap aps ‘no o one’s l liabi abili lity’ i is the 03 mos ost im important f for or it its rol ole in in fin inance. ….The Future: 04 Still ll plays a a big r role le i in official F al FX reserves. Can be be r re-fas ashioned a and r re-cycle led, i impor ortan ant i in electronics a and 05 could ld b be a an impor ortan ant c cataly alyst i in new, l low c car arbo bon t technolog ologies.

Q&A Questions? Comments?

LONDON GOLD MARKET PAST, PRESENT & FUTURE Ruth Crowell, C Chief E Executive 27 27 September 2 2019

WHO WE ARE Indep epen enden ent A Authorit ity fo y for Preciou ious M Metals ls Advanc ncing ng Voice ce and and Stand ndards Mar arket Suppor ort Stand ndards f for Champion ion Good Delivery Problem Solving the C e Com ommon on of t the M Mar arket – Metal Quality Tools & Training Good ood of of the e Global Precious Metals Code Principal contact Market Infrastructure Glob lobal I l Industry – Ethical Trading for regulators, media, Education industry and clients Responsible Sourcing

THE BANK OF ENGLAND Origins & Role The originator of the London Good Delivery List (GDL) (1750) and regulator of the gold market until 1987 when LBMA was formed. The Bank’s Bullion Vaults served the entire European market and the gold rushes in California, Australia and South Africa. It provides gold custodian services for the UK Treasury, other central banks and certain commercial banks including LBMA members. Has the second-largest vault (400,000 bars) after the New York Federal Reserve with more than 5,000 tonnes of gold. “…an open market for gold in which not only every seller would know that he would receive the highest price the world could pay, but also every buyer would know that he would get his gold as cheaply as the world could supply it.” Sir Brien Cokayne, Governor of Bank of England, 1919